11/12/2009 @ 6:35PM

Best-Case Scenario: Unemployment Rises

While the economy may be growing again, hiring has yet to rebound. The ever-climbing unemployment rate hit 10.2% last week, topping 10% for only the second time since the Great Depression. Even if job growth soon returns, the rate is certain to climb higher. Here’s why.

Population Growth

The unemployment rate is a simple calculation: the number of unemployed people who are looking for work divided by the number of people in the labor force. When the labor force grows, the unemployment rate increases. Jobs are created or cut based on the current economy, but the size of the labor force is poised to grow primarily because of births two decades ago. The higher birthrates of the late 1980s and early ’90s mean the workforce should be growing by more than 100,000 people a month.

That compounds the unemployment problem. Once the economy starts adding jobs again (in October, 190,000 were lost) it is possible there will be months where fewer than 100,000 jobs are created. This would lead to a period where employment is rising but the unemployment rate is still increasing.

Discouraged Workers

The unemployment rate does not include people who are so discouraged they have given up searching. These workers are still unemployed and many will return to job hunting if they see signs of improvement. If these discouraged and marginally attached workers all started looking for jobs today, the unemployment rate would jump to 11.6%. These workers will not return all at once. But as conditions start to improve, they’ll return to job hunting, driving the rate up.

The unemployment rate cannot come down until so many jobs are being created that it offsets the return of discouraged workers and the growing population.

Part-time and Furloughed Workers

Also buried in the unemployment report is the data point that 9.3 million Americans are working part time, although they want full-time jobs. When employers start to feel confident about recovery, a lot of their hiring will be from this pool of workers, shifting them back into full-time jobs. This is good news for these workers (and good for the economy, as they start getting fuller paychecks) but hiring full-time workers from the part-time workforce has no effect on the unemployment rate.

Statistical Errors

The Bureau of Labor Statistics, which calculates the unemployment rate, does not count every job in the country every month–it uses a survey. The survey relies on some estimates and guess work. But during a severe recession, the models do not function properly. The Bureau of Labor Statistics announced last month that it overcounted jobs by 824,000. This is a preliminary estimate that will be revised before it shows up in the numbers in February 2010.

This won’t be a worsening of the actual economy (the jobs, after all, are already gone, the BLS just didn’t know it) but it could cause the reported unemployment rate to jump. If 824,000 jobs have to be subtracted from the numbers in October, the unemployment rate was actually 10.7%. Even if employment start growing, it will take months to replace the 824,000 jobs that were miscounted.

Combining these four factors over the course of the next year paints an unhappy picture for the unemployment rate. Even if job growth returns immediately, the unemployment rate could easily hit 11%, thanks to the growing labor force, the return of discouraged workers, the hiring of part-timers instead of the unemployed and the looming revision. It’s essentially already baked into the numbers.

And that’s if job growth returns. David Rosenberg, chief economist at the investment firm Gluskin Sheff, argues that the conditions are hardly in place for robust job growth. Rosenberg estimates that the unemployment rate is “likely headed for 12% to 13%.”

Rosenberg may be considered bearish. But even a sober bull should realize the unemployment rate is likely to climb even if the economic recovery continues to gain steam.